Define Inherent risk and explain that how inherent risk is linked to Financial statements?

Inherent risk is the risk that items may be misstated as a result of their inherent characteristics.Inherent risk may result from:

     *   the nature of the items themselves e.g estimated items are inherently risky because their measurement depends on an estimate rather than a precise measures.

     *   the nature of the entity and the industry in which it operates. e.g a company in the construction industry operates in volatile and high risk environment and items in its financial statement are more likely to be misstated  than items in the financial statements of companies in a more low risk environment e.g manufacture of food and drinks.

When inherent risk is high this means that there is a high risk of misstatement of an item in the financial statements.

Inherent risk operates independently of controls , it cannot be controlled. The auditor must accept that the risk exist and will not 'go away'.